Feinman: The Decline of US Manufacturing: Fact or Fiction?

Most people think that US manufacturing has been on the wane for years.

On some levels, this is indisputable.

After WWII, about one-third of non-farm employees worked in manufacturing; only 9% do today. The value added of the manufacturing sector – the dollar value of manufacturers’ output minus the dollar value of the inputs used to produce that output – has also declined sharply: it once accounted for over 25% of nominal GDP, but now makes up less than 11%.

Much less well known is that, once the effects of price changes are stripped out, manufacturing has approximately kept pace with the overall economy. That is to say, manufacturing’s real value added has grown at virtually the same rate as real GDP. The Federal Reserve’s industrial production series for manufacturing, an independent measure of real manufacturing output, points to the same conclusion.

At first blush, this seems hard to believe. How could real manufacturing output have kept pace when the dollar value of that output, and the employment needed to produce it, have fallen so far behind?

The answer lies in relative prices and productivity. For decades, the prices of manufactured goods have risen more slowly than the overall price level. Since the relative costs of manufacturing have not declined, the only way manufacturers have been able to stay in business – let alone expand output in line with real GDP – is by becoming more efficient.

In fact, productivity has grown much faster in manufacturing than in the economy as a whole. And thanks to fierce competition, these efficiency gains have been passed to consumers in the form of lower prices, benefitting society at large. In a sense, the manufacturing sector has been subsidizing improvements in living standards for everyone else.

To underline the point, consider the good turn factory workers have done for the rest of the workforce. Manufacturing employees’ productivity has increased faster than that of their counterparts in other sectors, but their compensation has not. This is not because manufacturing workers have been short-changed: when deflated by the prices of manufactured goods, manufacturing wages have grown at about the same pace as manufacturing productivity. But since manufacturing workers also consume non-manufactured goods, their living standards have not increased at the same rate as their productivity. Meanwhile, workers in other sectors – benefiting from the relatively lower prices of manufactured goods – have seen their living standards improve faster than their productivity. In short, manufacturing’s loss has been everyone else’s gain.

This puts a whole different perspective on manufacturing’s so-called decline. It is true that fewer people work in manufacturing; but that is not because they have less to do, but rather because they do it so well. Likewise, a smaller share of nominal GDP is generated by manufacturers; but that is not because they produce less, but rather that their products sell for less because they are made so efficiently.

In some ways, what has happened to manufacturing parallels the transformation of agriculture in an earlier era. In the 19th century, most Americans worked on farms; today fewer than 2% do. And, just as manufacturing makes up a smaller share of the total economy, food comprises a much smaller share of the typical budget than it once did. But this is not because people are eating less well, but because the relative price of food has tumbled, reflecting huge gains in agricultural productivity.

Of course, it is important to remember that the changes in the agricultural sector created huge disruptions to economic and social life, just as the transformation of manufacturing has. But at the same time, agriculture’s decline helped fuel enormous improvements in material living standards. Hopefully, manufacturing’s decline will continue to yield similar benefits.